Here's What's Wrong With Ford's China Plan -- And What's Right

There is a lot to like in Ford Motor Co.’s news out of China this week. The company’s new alliance with Alibaba is a huge boon for the Dearborn automaker, and its renewed commitment to producing a full range of electric vehicles is a necessity not just in that market but around the world.

However, I also have some real concerns — particularly about Ford’s plan to introduce 50 new vehicles in China over the next eight years.

That represents a significant shift away from former CEO Alan Mulally’s strategy of streamlining and suggests a return to some of the bad old ways that got Ford into so much trouble not that long ago.

FILE - This Jan. 17, 2017, file photo shows a Ford sign at an auto dealership, in Hialeah, Fla. At least 30 percent of the new vehicles Ford will roll out in China by 2025 will be electric, with Beijing pushing hard to improve air quality for people living in smoke-choked cities. Ford said Tuesday, Dec. 5, that the new electric cars will fall under the Lincoln brand and its namesake. (AP Photo/Alan Diaz, File)

When Bill Ford tapped Mulally, then head of Boeing’s commercial aviation division, to save his failing car company back in 2006, the automaker was offering 94 different nameplates around the world. The former aerospace engineer thought that was “way too many.”

Ford had created this mammoth product portfolio out of desperation. When one product failed to achieve the desired increase in sales in a particular segment, Ford introduced another one. But it often kept producing the original model out of fear of losing existing customers and the market share they represented (The trade unions didn’t help matters either, often insisting on keeping assembly lines running even when no one was buying the vehicles that rolled off of them.).

Today, Ford faces a similar challenge in China. Its sales in the first ten months of 2017 totaled 938,570 units, down 5% from the same period in 2016. In contrast, its hometown rival General Motors Co. saw its sales increase 2.2% gains to 3.13 million units.

Ford was late to the game in China, and it is still playing catch-up. It cannot afford to lose ground like this. But that does not mean adding dozens of new cars and trucks to its lineup in the country is the solution.

Making Ford Soar

Mulally knew that adding more vehicles to the lineup was not the solution. What Ford needed, he believed, was to produce the best vehicle possible for each major market segment.

That was the same approach he had used to save Boeing. By streamlining its product lineup and concentrating Boeing’s energy and resources on producing just one home-run product for each of the major market segments, Mulally allowed the aircraft manufacturer to deliver better quality and class-leading features for customers, and greater economies of scale for his company.

It is worth noting that Steve Jobs took the same approach when he returned to the helm at Apple back in 1997.

Mulally’s streamlining strategy proved just as successful at Ford as it had at Boeing, and it helped Ford emerge from the Great Recession as the only American automaker to escape the industry’s collapse.

Rules Still Apply

Ford isn’t the only automaker expanding its product portfolio in China. Volkswagen AG has pledged to introduce a number of new models as well, though not nearly as many as Ford is planning.

Some will no doubt argue that things have changed since Mulally retired from Ford in 2014. They will say the automobile marketplace has become increasingly fragmented and argue that customer tastes have become more specific.

That may be true. But here is what has not changed: complexity.

Complexity is the bane of efficient manufacturing. Offering more models to consumers requires workers to do more on the assembly line, and that reduces quality and increases the number of defects. Complexity also reduces economies of scale by reducing the volume of orders for specific parts from suppliers. Those companies set their pricing based on volume, so placing three 100,000-unit orders for three different wheels costs a lot more than placing one order for 300,000 units.

There are things automakers can to help mitigate these issues, and Ford is doing them: building more vehicles off a common platform, using advanced manufacturing techniques and developing better relationships with suppliers. But these steps cannot eliminate the problems of complexity entirely, nor the added risk.

Given Ford’s poor track record of managing complexity, I am not sure that is a risk worth taking.